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Survey of RecentDevelopmentsy ofRecent DevelopmentsHal Hill aa Australian National UniversityPublished online: 16 Aug 2006.

To cite this article: Hal Hill (1987) Survey of Recent Developmentsy ofRecent Developments, Bulletin of Indonesian Economic Studies, 23:3,1-33, DOI: 10.1080/00074918712331335241

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SURVEY OF RECENT DEVELOPMENTS

Hal Hill Australian National University

SUMMARY

Indonesia continues to experience its worst economic recession in 20 years. There are signs of recovery, hut the recovery is at best patchy, and formidable economic problems remain. The two major issues facing policy makers in the last few months ~ and indeed since thc beginning of 1986 -have been the restoration of macroeconomic balance and monetary stability, and the introduc- tion of microeconomic reforms to hasten the pace of structural adjustment. Although the government has scored some notable successes on both fronts, much remains to be done.

From May to August the authorities were wrestling with yet another speculative flight out of rupiah, fuelled by persistent rumours of a further devaluation and the reimposition of foreign exchange controls. The currency flight was finally subdued by a range of quite drastic measures. but the costs, in terms of defer- ment of longer run policy reforms, have been considerable. The government's preoccupation with monetary stahilisation and the prospect of a major Cabinet reshuffle in 1988 have resulted in the virtual neglect of urgently required programs. The contrast with the flurry of policy reforms in 1986 and early 1987 is stark.

Nevertheless, there have been some notable achievements. First, the national accounts for 1986, released in August, revealed a growth rate significantly higher than even the most optimistic forecasts. Secondly, there has been a modest recovery in export prices: not enough to induce a return to rapid growth, but suf- ficient to provide some breathing space and to assist the process of structural reform. Thirdly. the devaluation and reform packages of the last 18 months are working well and appear to be paying dividends, particularly as far as manufactured exports are con- cerned. It is no exaggeration to say that. for the first time in its

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history, Indonesia is slowly emerging as a substantial exporter of these goods. Fourthly, and related to the third point, the Septem- ber 1986 devaluation has - like that of April 1983 - been particularly effective. There was a short burst of inflation after September, but nine months later it had largely abated. Finally, the government can take some credit for having withstood the speculative run o n the currency.

On the other side of thc balance sheet many daunting problems remain. First. despite the large devaluation and improved trade performance, the current account deficit is still large and Indone- sia's external indebtedness, while nowhere near crisis proportions, is cause for conqiderahle concern. Secondly, as noted. the sense of urgency and reformist zeal appears to have evaporated. at any rate for the time heing. There have been no major trade and regulatory reforms since January 1987. A vigorous public debate over the role of state enterprises in the first few months of the year has subsided, although the issue is still thought to he on the policy agenda. More generally, there is much cause for concern that Indonesia is miss- ing out on major commercial opportunities resulting from the rapid appreciation of the yen since September 1985 ~ both in attracting more Japanese investment and in increasing Indonesian exports to that country. Finally, although the food supply situation remains comfortable, a prolonged drought has affected food crop production. If the drought continues until late 1987 rice imports may again be required.

THE NATIONAL ACCOUNTS

The 1986 national accounts estimates, released as usual with the August Presidential addres?, revealed a much higher than ex- pected growth rate. The preliminary estimate of GDP growth in 1986 - 3.2% -was considerably higher than both the 1985 rate (revised up to 2.2%) and a variety of unofficial estimates'. Indus- try led the way, having both the highest growth rate and the largest incremental contribution to GDP expansion (Table 1). Within industry, most sub-sectors grew quite rapidly, in marked contrast to the last few years. Mining (96% of ushich is oil and gas) grew mainly because OPEC production quotas were virtually non- operative for most of the year. Oil refining and gas processing continued to expand rapidly, though less than in earlier years,

'The most accurate advancc cslimare seems to have brzn that of the Centcr for Policy Studies, which in irs mid-year report (CPS, 1987) suggested a rate af 2.8% Both the World Bank and the IMF in thcir annual May reports estimated GDP growth to have been 2.&%.

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TABLE 1: Growth of GDP"

*"""a1 Crouth Conlrlburia" r O Crarlh 1973-81 1981-86 1986' 1973-81 ,981-86 1986b

dgrlcvlture 3 .6 2 .8 2 .5 16.7 2 3 . 0 18.6 food crops 4 .6 2.6 1.9 13 .0 13.6 8 .7 small holders 3.6 6 .3 5.7 2 . 0 6 .6 5.7

6.1 -0.2 0 . 2 1 . 7 -0.1 n 3.0 1 . 3 3 .0 0.9 h . 6 2.4

-4.8 -7.6 -1 .1 -2.1 - 3 . 9 -0.1 4.7 4 .2 4 .3 1 . 1 2 .4 2 . 2

9.8 .in,ng 3 . 2

orher man"iacr"ri"g u t i l i t i e s 14.1 consrruccion 1 3 . 1

5 e N i c e s 9.5 rrade 1 . 8 -

1.3 -2 .3 15.2

4 . 1 11.9 0 . 6

4.6 3.1 6.5 5.7 4 . 0 7 . 2 3 . 2

4.1 4 .2 6 .8 4 .9 6.5

-0.2

2.8 3.0 1 . 3 5.3 3.5 2.5 2.8

37.4 4 . 5

123.2

1 .1 8 .6

45.9 17.4

7 .9 2 .8 4 . 1

L2.7 1.0

17.7 -16 .3

17.9 12.4

2 . 5 L.2

59.3 16.4 11.3 5.1 3 . 7

17.8 6.4

46.9 2 3 . 1

9 .8 1 3 . 3

1 .1 -0.4

34.5 14 .3

2 . 3 5 . 0 2 . 9 6 .4 3.5

m 1.5 2.9 3.1 1W IW IW

a : 1973.81 at coostant 1973 pr ices ; 1981-86 at conatant 1983 prices. n - neg l ig ib le

b: prel iminary.

Sourre: centra, B"rea" O f Srar lar ira .

( l e r a rha" . 1 z > .

because of rising oil and gas output and because new capacity was brought on stream. Despite the sluggish domestic economy, manu- facturing growth was quite strong, primarily because of export growth and the resumption of deferred purchases, particularly in the case of consumer durables.

Performance in agriculture and services was less encouraging, and growth barely exceeded population increases. The food crop sector grew at less than 2% which, while faster than 1985, suggests a worrying trend. Indeed. evcn this low figure may be an over- estimate given the virtual standstill in the rice sector, although other food crops have done better (Hobohm 1987, Table 8). In other agricultural sub-sectors the picture is mixed. Forestry output continued to decline, because of export bans and the slump in construction. The estates sector continued to grow erratically, while small-holders showed considerable resilience, partly because of the expansion of crops such as coconuts. Fisheries also grew quite rapidly, and the transition to an export-oriented processing

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industry does not appear to have had the same negative repercus- sions as have occurred in forestry. Services growth, largely dic- tated by the other two Scctors and by government expenditure, has also been subdued. Particularly notable is the very slow expansion in the public administration and transport sub-sectors.

As several surveys have pointed out (for example, Booth 1986; see also Sundrum 1986), GDP data are an inadequate indicator of domestic economic welfare and of international purchasing power during a period of sharply fluctuating terms of trade (TOT). 1986 was certainly such a year. In the new estimates BPS has begun to allow for the TOT effect by calculating a gross domestic income (GDY) concept. According to these data, the implicit export price index fell from 114.6 in 1985 to 93.2 in 1986. or by 18.7%. while that for imports rose by 10.1%. The result was a dramatic decline in the TOT of 26.2% (or 35.4% if measured using 1986 as the base year). In effect, about Rp 5.9 trillion of ‘purchasing power’ was lost during 1986 ~ because of the adverse TOT movement - out of a total GDP of Rp 96.5 trillion. Consequently, while GDP growth was better than expected, GDY still declined by about 3.8%’. Moreover, although GDP growth in 1986 exceeded that of 1985, GDY growth remained positive in 1985, at 1.4% (Booth 1986, Table 3).

The national accounts estimates also underline the fundamental differences between the years of the oil boom, broadly 1973-81, and thc ‘post-oil recession‘ period thereafter (Table 1). GDP growth after 1981 was only about one-third that of the previous eight years, and of course GDY growth has been much lower. The factors contributing to tha t growth have also altered considerably. The greatest difference is in the industrial sector, which accounted for almost 40% of the expansion in the period 1973-81, hut less than 20% after 1981, notwithstanding the pick-up in 1986 Indeed, mining growth from 1981 to 1986 has been negative. Moreover, important sectoral beneficiaries of the recycled petroleum revenue - transport, construction, and public administration - arc all growing very much more slowly. The most resilient sector in the 1980s, putting aside recent problems, has been agriculture, the growth of which over 1981-86 has not fallen substantially’. On the

’A small part of the mfference between GDP and GDY growth rates is also accounted for by a m e in net income accruing abroad, an item incorporated in the latter hut not the former. However. the effcct i \ very small, since Gross National Pruduct (that ia, tiDP less nri income accruing ahroad) grew at 3% in

Agriculture’s growth 1981-86 was 78% of Its growth from 1973 to 1981, com- 1786

pared tu the much lower percentages for industry (13%) and services (48%).

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expenditure side, most of the growth occurred in household con- sumption (up 3.3%) and, most encouraging, in exports (up 13.7%). There was virtually no change in the other items.

MONETARY STABILISATION AND GEBRAKAN SUMARLIN

At a time when the government, boosted by better than cxpccted economic news and a decisive victory in the heavily managed election, might have been formulating further structural adjust- ment packages, it had to wrestle instead with another destabilising and damaging speculative run against the rupiah for much of the period from May to August. Despite the large September devalu- ation, the foreign exchange market has continued to be particu- larly nervous. The result has been a series of unpredictable episodes of currency speculation. It was estimated that the flight totalled $1.7 billion in December 1986 and $500 million in January 1987, before settling down again just prior to the election. It then regained momentum in May. Daily turnuver in foreign exchange on the bourse. to support usual trading requirements, is $10-15 million. But in one day during May it exceeded $120 million, and for the month it was $690 million. There was some expectation that speculation would abate following the Idul Fitri holiday in late May. But in early June the Right resumed. with daily sales peaking at $119 million on June 8.

The initial government response was to raise interest rates by a small margin and then 'sit it out'. in the hope that speculative pressures would ease as the authorities indicated their resolve not to succumb. On May 8 Bank Indonesia raised interest rates on short-term monetary instruments by 1.5-2.0% to about 18-?0%, These instruments included the discount facility. the SBI (Ser- @kat Bank Indonesia) and the SBPU (Sural Berlzarga Pasar Uang)'. The rate on the swap facility (available to domestic borrowers as a hedge against exchange rate risk) was also raised, from 8% to 9%. Short-term rates were later raised again on June 12. In addition. Bank Indonesia announced that from June 9 it would release data on both sales and purchases of foreign ex- change, in an attempt to calm the market. Previously, the Bank had only been releasing one figure. which was presumed to be the higher of sales or purchases. Not surprisingly in a nervous market

%e SBI, or deposit certificates, are a means of reducing liquidity through sales by Bank Indonesia Conversely, through the purchase of SBPU, 01 money market securities, Bank Indonesia is able t o expand liquidity For an excellent review of the development of these instrument5, see Nasution (1986).

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thriving on rumour, the assumption was that the transactions had all been in one direction.

But the run continued. With reserves falling, more drastic action was required. However, the government’s room to manoeuvre was limited. It could hardly impose foreign exchange controls, despite persistent rumours that they were planned after the election and the June IGGI meeting. As government officials - including the Bank Indonesia Governor and the Finance Minister ~ have repeatedly stated (see for example Jakurtrr Post, 27 August), these controls would breach one of the fundamental tenets of the New Order: and they would hardly be effective given Jakarta‘s ’porous’ money and capital markets (Sumitro 1986, p. 39). Nor was further devaluation - as distinct from more flexible exchange rate man- agement - an obvious option. There w-as no economic argument for it, and in any case it would have played into the hands of speculators.

Domestic interest rates were therefore the only weapon avail- able. But, instead of raising rates directly, the government chose indirect, but equally effective, measures. On June 22 the Acting Finance Minister, Dr Sumarlin. instructed four large state enter- prises to withdraw large volumes of tunds from demand and term deposits. principally with the state banks, and to purchase SBIs. The tour corporations concerned (the state oil company. Perta- mina; the state electricity company, PLN; the fertiliser conglom- erate, PUSRI; and the Civil Servants’ Insurance and Saving Fund, TASPEN) initially withdrew about Rp 480 billion. Combined with further withdrawals and other measures, as much as Rp 1.8 trillion of liquidity was removed from the system in tbc following month (Jukurru Post, 25 July). The measure, quickly dubbed Gebrukun Sumurlin (Sumarlin’s shock therapy) - a term certain to enter the lexicon of Indonesian cconomic policy-making ~ was immediately effective. State enterprises account for at least 20% of state bank deposits, and such a sudden transfer of funds prompted a scramble for liquidity. The Jakarta inter-bank rates rose very sharply. peaking at over 46% in early July (Figure 1). This was one of the highest rates ever recorded; much higher than December 1986, though still below the peak rate in September 1984.

The government continued its pressurc on foreign exchange markets in July. On July 16 Bank Indonesia Governor Arifin Siregar announced the introduction of an auction system for SBIs and SBPUs (Bisnis Indonesia; 17 July). Through PT Ficorinvest, a non-bank financial intermediary owned mainly by Bank In- donesia, guiding ranges wcrc set, with the banks determining the exact rates. While the role of the monetary instruments remains

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Figure 1: Interest Rates on the Jakarta Money Market

unchanged (that is, Ficorinvest sells SBIs to contract liquidity and buys SBPU to expand it): the reform continued a trend towards greater flexibility, and reliance on open market operations rather than direct controls. At the same time, the short term nature of these instruments was underlined. Previously, banks had been free to acquire SBPUs for up to six months, provided they operated within a specified ceiling. This limit was reduced to three days. In effect, banks were forced to rely more heavily on time deposits to acquire funds'.

These measures had the desired effects almost immediately. Rising interest rates, coupled with a very mild appreciation. in- duced large capital inflows. From June 22 until July 11 a surplus on the bourse of $860 million was recorded; in the first half of July foreign exchange purchases were negligible (Business News, 16 and 17 July). By mid-July, over $1 billion had returned (Jakarta Post, 25 July). By late August the liquidity squeeze was virtually over. On August 20 Bank Indonesia cancelled the auction for SBPUs (Bisnis Indonesia, 21 August), suggesting that commercial

'Another measure, introduced at the height of the crisis but never formally announced, took the form of pressure hy Bank Indonesia on the commercial banks to break contracts for SBPUs already accepted (that 1s. hought) by Bank Indoncsia This measure. while causing consrderable con\ternation cn commercial banking circles. also had the effect of driving up interest rates. With lines of credit through SBPUs in effect elrminated, the banks were forccd to seek alternative financial sourccs.

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bank liquidity was satisfactory. This was confirmed over the next two weeks by statements from several state banks, and by small declines in time de,!osit rates, down to 19-20% (Kompas, Bisnis Indonesia, 5 September).

Why did the speculative rush occur: when oil prices were almost double those of early 1986, and after a devaluation? Many argue that the foreign exchange market lost faith in the government after the unexpected September devaluation. This is a peculiar argu- ment. as the devaluation in fact demonstrated the government’s excellent timing. There is also criticism. of some validity, that Bank Indonesia causcd unnecessary anxiety over the period. by failing to keep the market adequately informed. Officials remained inaccessible to the press, and information on foreign exchange sales was released only under pressure.

It seems, also, that Bank Indonesia statistics over the period do not convey the full picture. For example, according to its July bulletin. net international reserves actually rose by about $100 million in May and a further $200 million in June. The most plausible explanation for this apparent paradox is that these (end- month) figures conceal a sharp decline in reserves during the first half of June, and that the government drew down some commer- cial credit facilities - which are not normally included in reserves - to meet the rush. Also puzzling is the stability of the money supply over a period of enormous capital movement. Monthly money supply figures for the first seven months of 1987 fluctuated by no more than 2%. except for a 7% increase in May, and the composition between currency and demand deposits changed little. These puzzles may be explained by the usual difficulties associated with defining and measuring the ‘money supply’, and by effective sterilisation measures. But, in the absence of any official explanation from Bank Indonesia, these explanations concerning both the reserves and the money supply are only educated guesses.

While the government can take some satisfaction from the fairly speedy restoration of monetary stability, the victory has had its costs in terms of the longer run issues of promoting structural adjustment and growth. The most obvious is the impact of high interest rates on investment. Although lending rates began to decline in September, they are still generally above 25%. With real rates of hetween 15-20%, depending on the method of calcu- lation, Indonesia has perhaps the most expensive credit in Asia. Moreover. there is little prospect of a substantial decline in real rates (nominal rates can he expected to decline with inflation), since it is generally believed that a continuing large differential is required to defend the rupiah6.

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Many informed commentators believe that the uncertainty was triggered at least in part by the absence of major reform packages since January. For example, in July a leading Indonesian econom- ist asserted that the uncertainty '. . . has to do with a business climate which is not supportive and the size of domestic economic distortions, including import restrictions on important raw' ma- terials and inputs' (Nasution 1987). Similar sentiments were expressed by a member of Parliament (Fur Eastern Economic Review. Y July, p. 53). These opinions reflect the view of many that the reforms have not gone far enough given the urgent need to increase efficiency. and that politically sensitive areas have been left largely untouched.

OTHER MACROECONOMIC INDICATORS

Devaluation and Prices: So far the September 1986 devaluation has not been eroded substantially by inflation, as measured by the 17 city index. There was a sharp jump in prices in September and October, most indicators rising by 2-4% per month (Figure 2 ) . By the end of 1986 inflation had abated surprisingly swiftly. It rose again in February, mainly because of administered price increases for transport, rice and other goods, and again in May, when the Zdul Fitri celebrations pushed up food and clothing prices.

Inflation for the 12 months to July was lesq than 10%. and the annualised rate in mid 1987, after the May 'hiccup', was less than 5%. (It is also worth noting that, as would be expected, the prices of tradeable goods have risen more quickly than non or partially tradeable goods and services.) Indeed, inflation has fallen so quickly that the real effective exchange rate (that is, the nominal effective rate adjusted for relative inpation rates) in the first seven months of 1987 barely changed, according to the hlorpan Guaranty estimates (Asian Wall Street Journal, October 2-3). This is because, since the devaluation, the rupiah has been closely tied to the US dollar, which has itself fallen against most OECD currencies in the past 12 months'.

*In fact, the large interest rate differential has provided something of a bonanza for operators in the short term money market For example, i t was possible at the time of writing (Septemher) to borrow dollars in Singapore for nhout R % , purchase a. swap racility from Bank Indonesia f o r 9%. and open a term deposit with Jakarta banks for 211% or more. 'It may 01 course be argued that II real effective rate calculated by adjusting the

nominal effective rate for inflation in major wading partners is of limited use as an indicator of 'relative export competiriveness' What IS required for the latter IS a comparison of real effective rates with those of export competrtors, for example,

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, I

Figure 2: Monthly change in CPI (YO) , 1986-1987.

0.n 'i,

-LIyIIo l lR,

a s .. 23 .. I O . .

1 9 . .

0 5 . .

Balance of Pnymenls: Although no data are yet available for 1987188. it is likely that the current account deficit for the year will be in the range $2-2.5 billion, or about half the disastrous figure for 198hiS7. Several factors are expected to contribute to the improved result. First, manufactured exports continue to grow quite rapidly. Although Still small by East Asian standards, there has been a remarkable transformation in the composition of In-

Latin American and East Asian developmg countries (putting aside the special case of other oil exporters where, at least in the short run, quotas rather than compclitireness detzrininc export pcrforrnance). The Morgan Guaranly data for 13 such countneq over the period 1981 ~ J u l y 1087 indicale that only in Argentina and Venezuela was there a sharper decline in the real etlcctwe rate

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previous year. Although most of the improvement has come through increased receipts, which have risen three-fold in the last five years, the domestic recession and the exit tax (fiskal) - increased to Rp 250,000 after the September devaluation - have also contributed.

Several other factors explain the expected improvement in the current account. One IS that imports are expected to contract, or expand very little, in 1987. continuing a remarkable pattern in which non-oil imports have fallen by about 10% in nominal dollar terms every year since 1982/83. Moreover, some export prices are beginning to recover. The doubling of oil prices since early 1986 is the most important development. although the beneficial effects on the government's budget are not as great as might be expected: increased debt-service payments have wiped out part of the re- venue gain; domestic petrolcum prices have not risen commensu- rately with the international price; and lYHhi87 was such a t igk. financial year that some expenditure commitments were rolled over into the current year.

There have been favourahle movements in other commodity prices also. In response to rising prices. the removal of export restrictions, and new mining technology: Indonesia has been ex- periencing somcthing of a gold boom (England 1987). From late 1985 until September 1987 about 160 exploration contracts have been granted, mostly to Australian interests. According to official figures production in recent years has been about 2.5 tons, but unofficial estimates indicate the real figure is probably three times higher; production could reach 20 tons in the near future'. Official exports in 1987 are likely to exceed $100 million. In addition to gold, copra and palm oil prices have risen: both are now almost double those of 12 months ago, although palm oil prices are still well below the 1983/84 peak.

Nevertheless, in spite of these encouraging trends, Indonesia's balance of payments problems are far from over. Two issues in particular arc cause for continuing concern: international debt and international market access for exports.

FOOD CROPS AND THE DROUGHT

As the last survey pointed out. there is little prospect of any increase in rice production for the second consecutive year. The

?he Ministcr for Mining and Enrrgy. Dr Soebroto, suggeited that praductmn could men reach 150 tons by 1u45 (Indonesia Cornmema1 .\bewriener, 25 Mag), a forecast which is generally regarded =E too optimistic.

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consisted of small quantities of glutinous rice not available locally, and of repayment in kind from the Philippines in exchange for 150,000 tons provided to that country in 1985186.

STRUCTURAL ADJUSTMENT: THE TRADE AND REGULATORY REGIME

Although there have been no major trade and regulatory reforms since January, several developments warrant attention. In June the new DSP (Investment Priority List) was released, and it continued the trend towards a more liberal business code (see Jakarta Post, Kompas, 12 June). Licences are now valid inde- finitely, as long as the plant is in operation; previously licences had to be renewed every five years. The product categories in the DSP have been broadened considerably, and the total number there- fore reduced from 2,292 to 'only' 342". Expansion of production of up to 30% over the licensed total is now permitted automati- cally. The process of granting licences is also simplified from the previous four stages (agreement in principle, preliminary, final and extension) to two. But the new measures, welcome as they are, leave many areas untouched. For example, as Business News pointed out, they were not accompanied by measures to promote a more competitive environment:

, . . the important areas governed by monopolies are not covered, so that its [the DSP] impact on the economy , . . is feared to become marginal . , , with the expanding areas controlled by the monopolies, would-be investors will raise the question: what is the prospect and benefit of investments if competition is yet to be faced against the monopolies, or extensive materials under their control are still to be used (Buinesr News, 17 June).

In fairness to the BKPM, many trade controls are beyond its control, as are also, for example, the activities of provincial governments. But the regulatory regime remains very complex, and many of the regulations are a very ineffective means of attaining stated objectives.

As an illustration of foreign dissatisfaction with the regulatory regime, a large Japanese business delegation to Indonesia in August complained that Japanese companies are unable to export

"Some of the examples provided of this simplification illustrate the complexity of the old system. For example, under the previous rules there were no less than 49 kinds of meat products specified: firms wishing to switch (to almost identxal) products were required to submit a new application.

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directly to Japan from Indonesia. as they are from neighbouring countries, and that the requirement that foreign equity be reduced to 49% within 15 years (previously it \vas 10 years) was deterring investors (Bisnu Indonesia, 1 September). The BKPM Chairman, Ginandjar Kartasasmita. himself conceded that the provision had discouraged foreign firms from transferring technology to their local partners (Kompus, 23 July). Certainly Indonesia’s record in attracting Northeast Asian investment in rcccnt years has been disappointing. Although Japanese and Taiwanese investors have been switching to North America and Europe, and Indonesia‘s inflow was historically inflated by large one-off projects like Asa- han in the 1970s. its share of Japanese investment has fallen very sharply in the mid 1980s (Table 2). The share of Northeast Asian and some ASEAN countries has been holding up quite well: it is hardly a consolation that only the Philippines is doing worse.

Several other aspects ot thc regulatory environment have recent- ly attracted attention. One is a trend towards greater regulation of new-ly emerging export industries. indicating that an outward- looking strategy doe? not necessarily imply less intervention. The government’s prohibition of rattan exports. to be implemented progressively from this year, raises a similar range of issues as those relating to the earlier ban on log exports. But the rattan export ban actually entails a good deal more regulation since, although the crop is mostly grown outside Java. the government has announced that processing for export may be undertaken only at two designated centres, Jakarta and Surabapi (Risnis Indonesia, 29 August, 2 September). The arguments for this regulation - that the skilled labour and container and shipping facilities are not elsewhere available - arc hardly persuasive. They were not invoked at the time of the ban on logs: it remains to be seen whether mounting protests from the Outer Islands can overturn the decision. Recently. also, the government has announced a sole exporter in the case of leather products, and has tightened timber exports considerably.

Another issue concerns speculation that there may be changes to the custom inspection system (Far Eastern Economic Review, 11 June; Kompas.: 3 July; Jakarta Povr, 21 May, Asian Wull Street Journal, 29 September). The current system. involving the Swiss firm SGS, has been highly successful. But it has also been some- thing of an affront to nationalist sentiment. The government’s contract with SGS expires in early 19XX, and this will provide an opportunity to introduce modifications. There is; fortunately, thought to be little prospect of reverting to the old system.

The allocation of overseas (mainly United States) textile import

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TABLE 2: Japanese Investment in Asia

(US$ m i l l i o n , or % of t o t a l ) =

1985/86 1986187 1951152 1986187 z x f

Indonesia 408 3 . 3 250 1 . 1 8 ,673 8 . 2

Other ASEAN Malaysia P h l l i p p i n e s S i n g a p o r e Tha i land

6.- m Northeast Asia China Hona Konn

527 4 . 3 605 2 .8 79 0 .6 158 0 . 7 61 0 . 5 21 0 .1

5.651 5 . 3 1 ,283 1 . 2

913 0 . 9 339 2 . 8 302 1 . 4 2 ,571 2 . 4

48 0 . 4 124 0 . 6 884 0 .8

479 3 . 9 1,455 6 . 5 100 0 . 8 226 1 . 0 131 1 .1 502 2 . 2

7 ,115 6 . 7 513 0 . 5

3.433 3 . 2 - - Korea 134 1.1 436 2 . 0 2;118 2 . 0 Taiwan 114 0 . 9 291 1 . 3 1.051 1 . 0

Other 21 0 .2 1 7 0 .1 351 0 . 3

rota1 1,435 11.7 2,327 10.4 21.790 20.6

a: % refer t o X o f a l l Japanese investment abroad.

Source: Jakarta JETRO o f f i c e .

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quotas has surfaced again. This has been a contentious issue in recent years. with exporters complaining that quotas were allo- cated too late to fill orders. that the iillilcation criteria were unclear (and not public). and that there were many bogus quota holders who, in effect. sold (or .leased') their quotas to genuine producers. The issue has been highlighted in the press, also. h y a particularly acrimonious dispute between varioub textile associations and businessmen, centred around the quota?

Changes to the method of quota allocation in June are the most far-reaching to date, and they should ensure high quota fulfilment". Existing quotas will, as before. be baed on past export perform- ancc New quotas are to be determined largely by past pcriorm- ance, with concessions ro small-scale and pibumi producers. Most important, there are now stiff penalties for underfulfilment of quorar, and quota holders may transfer their entitlement by auc- tion. (Quota holders transferring their entitleinenl i n this manner will have their entitlcment cut by ?O'?b in the following year, an outcome prefcrablc to underfulfilment, which is liable to result in cancellation.) 1-extiie exporters are generally pleased with the reforms. and auction procedures appear to be workins satisfac- torily. The new system is niciie transparcnt. since the quota hol- ders and their entitlements are now published Moreover, the levy on textile exports. n h c h was being paid tu one of llie associations involved in the dispute for 'promotional' purposes. has also been

However, there is still scope for improvement. By mid- September the Departnicnt of Trade had allocated only 70% of the US quotas for (American) financial year l'JS7:88. And basing the quotas mainly on past performance means that the system is locked into the initial allocatirin, which cmfers substantial rents on some bogus exporters with powerful connections. Some export- ers have also been caught up in conflictinp guidelines between government departments: on the one hand the Department of Trade occasionally inspects exporterb.' iactories to verify they have the machinery (and thus are genuine exporter<). while t h e Depart- ment ot Industry is promoting subcontracting (thc so-callcd hupak angknt rcheme); under which larger firins are under pressure to

"Lest it be though1 that low utilisation of quotas is not serious, it needs to be remembered that Indonesia's garment cxports to the United States now exceed $300 mlll1oc1. So even 8iW luliilmcnr m d t s in lost exports of $60 mdhon. and [he pombtlir? oi IOM'CT quotas ~n future years.

Hnwcvcr the body. Asosiasi Psrrckmlan lndrrncria (APT. IndwIc\ran Tcxtile Asaociaiim) ha\ yei io ,,iii~lacionly account for thc total of Rp 1 hillion w n t m butcd under ihe I m y ,

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put out some of their orders - and productive capacity - to smaller firms.

Is the present system the most desirable one? Economic theory would suggest an annual auction, with the proceeds accruing to public revenue. While still a prcierred longer term option. thcrc are two quite persuahivc ;ifgumenis for retention oi the current scheme tor a few years. The first is the argument of textile exporters that, the problem of 'free riders' notwithstanding, they shoiild reccivc some recognition of thc fact that they devcloped the US market heiorc the iinposition of quotas. Some turther argue that in t h e la5t 'quota-free' year they undertook a particu- larlp vigorous export campaign, in the knowledge that export levels in that year woiild forin the basis tor subsequent quota levels. Secondly, there i \ apprehension that, iintil the current system has been operating for a few years, it may be hcyond thc capacity of the Ikpartment of Trade to admini~ler new arrange- ments fairly. They point, not unreasonably, to the formidable lobbying effort necessary to have the lis! of quota-holders puh- lished, a partial auction systcm introduced, and the export levy abolished.

Another important development in the regulatory environment is the remarkably effective operation of the duty free and draw- back meacurcs introduced as part of the May 1986 package". The record is impressive both for the liberal manner in u,hich the PAKEM proposals were intcrpreted. and for the efficient adminis- tration of P4BM. The package was introduced in place ot the Sertitikat Ekspor (SE, or Export Certificate. which wiis comidered a subsidy - and therefore dropped ~ when Indonesia became a signatory to GATT). and was designed to enable exporters to obtain inputs at international prices. Originally, if firms wcre exporting less than 85% of thcir output they were required to demonstratc that domestic supplierc were neither price or quality competitive; fur remaining firnis no cuch verification was required. But the former provision was found. not surprisinely, to he un- workable. and i t has since been dropped.

After initial tecthing problems the vAicnie is proving to be most effective. Firms were initially slow to parlicipiite -by thc end of 1986 only 197 had participated, h u t this number had risen to 416 hy August 1987. Requests for duty-free iinports are being handled in

The only comphcation is the prohferation 01 acronyms The packagc i5 re- fcrrrd t u as PAKCIVI. the hod! which supcrvisct the program i\ PdBM ( P U T U I P m ~ d o l o m Prmh?buwm &in P ? n p r ! l ~ u l m Bw M ~ c h . III Ccntrc lor the Admi- ni\tration of lrnprirt Dcaubach a n d Rcliefj

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three working days, providing firms comply with requirements (the regulations required a maximum of two weeks): drawback payments are taking s z w i to nine days, as compared to a statutory limit of one month. From Ju ly 1986 io August 1987 there had bccn $209 million of exports through duty free prwisions. and Rp 5.1 billion in duties returnedI4. Users are unanimous in their praise, and most are now hookcd into the Centre's computer nctwork for rapid piocessing of new request?. The only real limitations are that the Cenrrc rcmiiini undzrstaffed and some firms. disheartened by the initial provisirm requiring iiomcstic price compariwns. are unaware ot the subsequent rcforms.

The I'AKEM has therefore exceeded even the most optimistic expectations at the time of its introduction. Following the removal of the SE, there was widespread speculation that Indonesia's textile cxports might lollow the 'Columbian' pattern (on which see Morawetz 1981) of boom and bust. In fact, PAKEM is a n im- provement on SE in at least two respects. First, i t is a relatively costless exercise tor the p c r n n i e n t . apart from it? administra- tion. 'The SE was seemingly more gcnerous, but its benefits were eroded by xlministrative malpractice; in cffcct. these malpractices were being suhsidiscd by the gwernment. The second improve- ment may he cvcn more important in the long run. The program has demonstrated that the burcaucracy can implement a fairly complex regulatory syslcm in ii most effective manncr. I t has thus had an important 'demonstration effect' for other sections of the

, and for busiiies\-government relations. result of recent rcforms, the pardmeters of the trade

policy dcbatc are changing. Some of the measures have been so effectivc (for exarnplc. in textiles) that trade and rcgulatory reform now no longer figures prominently in discusion over measures to promote industrial growsth. Moreover: thc cxpmsion ot manufac- tured exports is forcing a rcalignmcnt of opinion towards industrial policy making. For example. the Deparimcnt of Industry, once a bastion of protectionism, iiow' has to contend with its growing constituency of exporters. During the import substitution phase the Ucpartment controlled the levers of growth and profitability (essentially through protection and harriers to entry). In thc new export phase it now has to be concerned with a much broader

I h c lrirmer h p r c is ~ m p r c s w e : it rcprcscnt\ ;about S"jo of Indonc\la'\ m;mulac- tured eYp<,rt< m I ' M . o r a l h u t Is"& oi thc m a l crclud~np p l y b b ~ ~ d Tc~tile$ garrnunl, and &ct roniC~ have hrcn the malor brnehclarie\ of ihc rchrms. In thc casc oi ihr dr,iwhdck 4h'% l h gonc to garmmts ant1 18% t u tcmic\ TIIC milJoT users oi the duty tree provision have h e m ~ I I - C I I I ~ I C S (21%). wood pnlducts (18%). and garmcnts [17'':0j

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range of issues affecting competitiveness. It therefore has much more of a stake in general economic reforms than was previously the case.

STRUCTURAL ADJUSTMENT: STATE ENTERPRISES AND PRIVATISATION

In Deccmher 19x6 the President instructed the Coordinating Eco- nomic Minister Ali Wardhana to csamine all aspects of state enterprises, and to explore the possibility of selective privatisa- tion. The instruction. which was not formally announced until February 4. resulted in a tlurry of activity and precs reports. It raised the possibility that at last the government was going to tackle the problem of a huge under-performing sector of the economy, and to challenge an article of faith of virtually all Indonesian governments in the post-independence era. However, by the middle of the year, public discussion or the issue had just as quickly disappeared, leaving many to wonder whether, lihe trade reform and deregulation, the issue was being shelved in the censi- tive Presidential pre-electinn period: or whether the issue is so complex and the vested interests opposed to reform are so power- ful that the matter was being quietly forgotten. Whilc hoth expla- nations are relevunl, discussion over state enterprises is likely to resurface again in the calmer waters of 1988. For a government intent on promoting efficiency and tackling the 'high cost econ- omy', the issue cannot go away.

How large are state enterprises and how have they performed? The truth is that no-one. not even officials in the Department of Finance. knows the answers to these questions. The most com- plete public information is that published annually in the L.umpi- ran I'iduto Xenegaraun since 1'18?. The data suggcst that state enterprises are hoth very liirgc and poor performers (Tahle 3). While ofticially nurnhcrinp only 214 enterprises, their sales in 19X6i87 were estimated to he Rp 32 trillion. or about one-third of GDP. Their assets were about Rp 114 trillion; assets of iion- financial enterprises alone arc cquivalent to almost 400% of cen- tral government domestic revenue.

Complete information on financial flows between the Sovern- ment and its enterprises is not publicly available. 'I'hc latter are a majos conrce ot corporate tax rcvenue, in recent years contrib- uting between one-third and one-half of the total (and excluding the oil revcnue collected via Pertamina), with dividend payments a furthcr half to two-thirds of tax receipts. Conversely, governmcnt equity injections in these firms have been substantial (Kp 600

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TABLE 3: Aggreguie Indicators of Stare Enterprises, 1983184 86/87

( R p b l l l l a n )

1983184 1981!85 19RS186 19861R7a

Number' of e n r e r p r i s e a

A * S * T l

S a l e s

D i v i d e n d ( B L P )

P r o f i r

c o r p o r a t e t a x

- x O f L o c a l c o r p o r a r e

C0"ernme"r c a p i t a 1

tax p a i d

i n , e c t r o n

2 2 2

7 2 . 8 9 5

2 0 , 3 3 5

1 7 1

1 . 9 7 5

357

47

592

2 2 2

8 7 , 3 6 8

2 5 , 9 2 0

266

2 . 2 0 0

593

49

336

2 1 5

9 8 . 7 1 5

2 9 , 5 3 9

6 2 5

2 , 5 2 5

7 8 4

47

4 1 2

2 1 4

1 1 3 , 6 9 6

1 2 , 2 9 8

1 8 4

3 , 0 9 0

927

34

91

G ' - l a r g e s t s e c t o r , 1

a P r e l i m i n a r y d a t a . b i n d i c a r e s i n d u s t r y : c i n d i c a f e r b a n k i n g .

I n some c a s e s d a t a r e f e r Z D c a l e n d e r y e a r s ( 1 9 8 6 / 8 7 t o 1 9 8 6 , e t c ) .

source : L a m p i r a n P i d a t a x e n e g a r a a n , v a r i o v s i s s u e s .

billion in 1983/81), although falling in recent years owing to financial stringency All this represents a very partial picture of these financial flows. however: there are numerous 'off-budgct' transactions, in addition to very substantial on-lending of foreign loans.

Contrary to popular opinion, the coverage of statc enterprises (narrowly defined) in the Lampran IS reasonably complete. For example. Bank Indonesia is included, as are the srarc commercial banks, Prrtamina, Garuda. the propcts under Minister IIabibie, and even government-private joint ventures (,such as PT Inalum at Asahan). Where the list is less complete. however, is in its cover- age of cnterprises somewhat loosely connectcd with the central government. A report released in May by a business consultant. Christianto Wibisono. caused con~idcrable controversy whcn it claimed that, in addition to the 214 cnterpriscs, the government ran or effectively controlled a further 206 (Jrrkarfci Post. 5 May). The additional firms iiiclude those owned by provincial govern-

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rnents, those which are off-shoots of state enterprises, and those not owned by the government but in which it has an entitlement to take up shares. To the total of 420 firms might also be added a plethora of yuyasan (foundations) and enterprises connected with the military.

The financial data - not to mention numerous micro studies - suggest state enterprise performance has bccn rather poor. The rate of return on assets has been less than 3"% (Table 3). However. the information is SIJ aggregated and the data base so weak that little can be inferred from this figure. except that even it is probably an overstatement. What is clear is that Bank Indonesia is one of the major profit-earners. In 1985i86 it recorded a profit of Rp 1,974 billion on assets of Rp 23.864 billion, implying a rate of return on assets of the remaining firms of just 0.7'3. There is in' fact considerable variation in financial performance among depart- ments, ranging from a rate of return ot firms under the control of the Forestry Department of over 22%. to just 0.1% for the "on-Department' group (mainly Dr Habibie's),

But even these figures tell only part of the story. The estimates of assets are very approximate, and there is a complex array of inter-firm transactions, government subsidies and non-economic ohhgations. Consequently. the only means of evaluating the per- formance of individual state enterprise is through detailed case studies.

Press coverage of the issue has not disappeared altogether, and recent reports indicate some of the major parameters of the likely debate. Pelni, the troubled state-owned shipping company has been under scrutiny again. In spite of a defence of its large losses hy a senior government official (Tempo, 4 July, 2 May), the Managing Director was replaced in September, allegedly because of over-crowding on the ships (Korripus. 7 September). It was also disclosed by the Head of thc Government Auditing Agency (BPKP) that only 20% of state entcrprises followed Indonesian accountancy principles (Bimis indoneriu, 29 .July); furthermore. a law professor pointed out that the legal basis on which many state enterprises were established rcmains unclear (Badrulzaman 1987). The very complexity of administrative arrangements contributes to the general confusion. In the 1987 Lanfpi'iurm the 21d state enter- prises are grouped by both Department (of which there are 15) and status (a total of seven), resulting in up to 105 categories".

Consider, for example thc large group ut 'date manufaactunng firms: 30 are limitcd liability firm5 solely owned hy the guvcmmcnt while another I6 arc p n t ventures; two arc perurn (peru.d iann umum), meaning they arc to provide puhlic

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While there is pressure to improve state enterprhe perfor- mance, there is equally formidable opposition to radical restruc- turing, including divestment. There is a deep-seated ideological antipathy to privatisation in some quarters, as indicated by a recent statement by the Minister for Public Works that those advocating it were trying to 'learn from America' rather than considering the Indonesian context (Konipas. 14 August). Then there arc practical considerations: senior bureaucrats have a per- sonal stake in state enterprises since, by sitting on several Dewan Komkuris (Board of Commissione, s ) , they receive fees many times their basic salaries, in addition to other benefits. The senior management of state enterprises might be expected to oppose privatisation, although there is evidence that some at least - tired of a negative press and stifling restrictions - w x l d welcome the opportunity of greater commercial independence.

There are also complex questions regarding methods of dis- posal, selection 6f firms for privatisation, and asset valuation. It is frequently asserted that profitable firms should be retained; how- ever, since the profit figures are virtually meaningless, profitability per se is no argument for retention. The issue of privatisation is complicated by the absence of a well-developed capital market. The current stock exchange is so regulated and moribund as to hardly merit the name. There is, at last, the prospect of major reform of the stock market in 1988. At the very least, the reform will have to remove government controls, permit pension funds to enter the market, and consider the taxation of interest on term depoqits

Finally, if there is to be privatisation, who would be the buyers? Given the strength of nationalist sentiment in Indonesia, this is perhaps the most Tensitive consideration. Foreign investment regulations have been liberalised since 1984, hut they remain comparatively restrictive. The potential number of domestic buy- ers is limited, and there is a widespread fear that privatisation could in effect mean 'familisation'. It is for this reason that, ironically, those generally advocating liberal economic reforms have been reluctant to endorse privatisation. unless the methods of disposal are ven, clearly specified and open to public scrutiny.

For all these reasons, and with a new Cabinet in prospect, it is hardly surprising that there has been little action. The Minister of

services on a cost recovery basis; and three each are PN (perusaham negara) and PT Lama (Old PT), the roles of which are unclear. There are also manufacturing firms, of varying \tatus, within Mmmng and Energy. Agriculture. Finance. and the 'Non~Dcpartmrnt' group.

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Agriculture stated that at most two of the 35 state enterprises within his Department would be considered for disposal (Jakarta Post, 13 February). A senior Pertamina official ruled out divest- ment of the company or its subsidiaries (Jakarta Post, 16 March). The only firm offer seems to have been IWO govcrnment hotels akiough, reterring to onc of thcm, the Minister for Tourism. Post and Communic;ition stated that it was in such bad condition that hc was 'douhtiul whether t h e property will bc able to attract private ihvestors' (Jukurra Parr; 25 Fehruary).

Nevci~theless. the problem is too big to hc ignored. What, then can the government do'! If, as seems likely, wholesale divestment is pot.iically unacceptable, the government F r i l l has a number of options. One is to retain state ownership but to introduce performalice-oriented inceiiti\'e( and grealer commercial indepen- dence lor senior management. The latter face a daunting range of hureauci~atic cunstraints. including onerous reporting require- ments and so little autonomy that :hey tire not even responsible fx recruitment of middle-level management. Provided these firms operate in :L competitive environment (as most manufacturing and agricultural enterpricey should), there i> no reason why the huge number ot controls and restrictions could not be replaced with a limi~cd numhei of financial targets. or even a single one. In the process the link between performance and financial reward - which currently barely exists - would have to be strengthened. One way for the government to proceed would be to award (or even auctiixi) management contracts for particular enterprises and for specified period\. In addition, if capital market reforms are introduced, parcels of sharcs (even up to majority owiicrship) could be floated as a means of securing badly needed capital injections for many of thcsc firms.

Finally, i t needs to he emphasised that privatisation is no substi- tute for, and much less important than. liberalisation of the trade and rcgtilatory regime>. If the governmcnt were to ensure a competitive environment. in which state enterprises received no special assistance (other than, perhaps, open subsidies. as in the case ot urban public transport) and were not saddled with non- economic obligations. and in which there were no barriers to entry and (more important) exit. ownerchip per se would not matter greatly. Indeed. in terms of the sequencing of reforms. liberalisa- tion should precede privatisation, both because potential private investors would be reluctant to enter a heavily regulated industry and because; in the absence of reform. there would he little point simply transferring monopoly power and other privileges from public to private hands'% Moreover, to the extent that the im-

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plementation of major economic reforms in Indonesia requires high-level bureaucratic resources and political wpport, privatisa- tion ?hould perhaps temporarily take a hach seat.

THE MANUFACTUKIUG SECTOR

AlthouSh manufacturing has performed better than expected in recent years. the picture as noted above is very mixed. What is clear is that the malor factors which propelled Indonesian indus- trial growth in the 1970s domestic demand and state mvcslmeiit -have disappeared. at lcast for the present. The new engines of growth will have to be export? and the private sector.

As reported in the last survcy (Hohohm 1987. Table 6). domcs- tic investment appro'als (which are mainly nianutiicturmg) are particularly buoyant. By the end of July they had reached Kp 1.8 trillion. and seem set to exceed, at least in nominal terms, the pcak total of Rp 7 trillion in 1983 (Komprrs. 25 August), a figure inflated by the impending removal o i tax benefits. The 1987 figures are something of a puzzle given the still 4uggish domemc cmnoniy, political uncertainty. and vcry high interest ratcs. They arc only approvals data, however. and may bear little relation to realised figures. The foreign investment approvals convcy ii much less rosy view of the business climate; they totalled $804 million up to the end of July, a large nominal decline from the 1983 figure of $2.882.

Several of the major growth areiis in manufacturing are those industries which havc hcgun to penetrate export markets (Table 4)". Among consumer goods. the kwtek cigarette industry con- tinues tca grow regardless of cconoriiic conditions (and thc begin- nings of a public hcalth campaign), and it is by far the largest manuiacturing induztry Output has doubled since 1980 and Gu- dang Garam -which a c c ~ u n t s for 1(J% of production - expects to incrcasc output by a turthcr I O % this year. The sharc of white cigarettes has fallen from 40"/,, to less than 10"/;1 in the past dccade. and in May white cigarette producers urgently requested the government to remove entry barriers to krrtrk production ( I n -

It is worth recalling the c~nclusion of a major ~evieiv of privatiaation under the Thatcher gorcinmcnt l ' ~ v a n ~ , t t m n uill tend 10 mpro\r performiincc 111 a c o n - pan? unly 11 5opportrd h) l h c r d l i w m ;and it Ihc>C l w o conflicr. I i k r . i l h a t m n 15

decidedly to bc pcrtericd (Kii? and Thnmpwii 1986. p 2 0 . Sce alsu the rccrnt and forthright ~ c l x r t o f the S inyporc ( i ~ ~ v e r n m c n i (14S7)

I'he BPS quarterly producilm index ilucroi~ic> c ~ m ~ l c r a h l y and its samplc m e may hc too small 10 Ipich up trcndh i n wme m d u s n c s More~wcr . thc I w t ind~catar oi trend\ I S :i compw~\m of mc ~ I I B I ~ C I ' \ index with the cor ic rpundin~ period 12 months earlier.

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TABLE 4 Index of Manufacturing Production. Selected Industry Groups, 1980-87 (1975 = 100)

1986 1987 Nulnher of 1980 1981 1982 1983 1984 1985

F.stahllshmentsa Ql 92 q3 94 91

C0ns-r Goads White c i g a r e t t e s

Yarn Clove cigarettes

WeaYing

Inte-diate Gods PI )wood Paper Rnsic chenieals

Tyrrs and tmbes Glass Cement I r o n 6 . tee1

N OI F e r t i l i z e r

cap i ta1 Gaods Structural metal products E lec tr l caJ a p p l i a n c e s Motor veh ic l e s Motor c y c l e s

A l l Groups

13 130 124 20 151 180 20 118 126

193 126 138

6 392 471 8 153 152

13 128 127 3 466 492

12 257 301 17 208 257

7 367 391 15 1,034 1,247

24 172 188 16 340 349 17 194 248

5 114 164

194 213

115 120 186 196 121 114 130 121

424 438 148 129 130 132 496 560 294 300 259 227 419 566 970 1,147

196 203 333 351 226 198 187 130

213 226

117 97 80 101 83 78 224 246 254 280 256 275 123 110 102 122 120 116 ~~ ~~

125 127 141 130 119 136

418 387 320 438 460 498 164 182 217 205 215 185 147 149 152 138 133 195 706 850 787 862 951 1,120 300 311 298 293 363 361 247 249 183 262 233 301 616 686 687 792 804 785

1.165 1,158 1,224 1.555 1,203 1,452

197 214 205 234 207 227 279 243 259 224 177 209 179 183 1 7 7 281 210 175

93 100 89 135 154 134

240 258 251 281 275 293

74 296 168 162

335 228 179 794 309 237 812

1.254

179 161 191

86

268

a a s a t 1986.

Source: BFS, lndikator Ekonomi, Yarious issues. Dow

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donesian Business Digest, May 1987). Some other consumer goods industries are also doing quite well. Garment exports are growing very rapidly, in the process pulling along the textiles industry. There i? also expected to be a spurt in furniture output following the ban on rattan exports. In the first half of 1Y87 seven rattan processing projects were approved, in Jakarta, Surabaya, and Banjarmasin (Indonesia Commercial Neiewslutter, 29 June; Fur Eastern Economic Rei:irw. 13 August). Rattan exports totalled almost $90 million in 1986 and so, even allowing for inefficiencies in the introduction of the ban, there will he a considerable boost to domcstic value added. There is also some evidence that footwear exports are at last expanding; with the large BATA plant now selling in the price-sensitive African and Middlc East market?.

Perhaps surprisingly, intermediate goods indu?tries are doing better than expected. There have been 3ignificant changes recently to the Asahan projcct, Indonesia'q largest single industri, d I invest- ment. The company has been cxperiencing major debt-service problems because of the rapid appreciation of the y i z (in which its large debts are denominated), and environmental problems to do with a decline in the water level in adjacent Lake Toba. To counter the first problem there have been large equity injections by both the Japanese and Indonesian (government) partners (Business News. 12 August). Major operating changes have also recently been introduced to ensure more efficient water use. With these problems overcome and international prices rising> by 50% in 1987. the project appears to be viable; in August plans were announced tor an expansion in capacity from 225,000 to 300.000 tons (Jukarta Post, 31 August).

The ccment and fertilizer industries have been affected by slower growth in end-user industries, but both seem to have adapted reasonably successfully. Fertilizer output growth has been extremely rapid since 1980 (Table 4) and, based on its natural gas reserves, Indonesia is now developing a profitable cxport business, the latter having risen from 45,000 tons in 1982 to 1.5 million tons in 1986 (Indonesia Cornmercinl Wewrlefter, 10 August). The six plants (five state-owned, one an ASEAN joint venture) are all reported to be operating at quite high levels of capacity, so much so that two more are to be built in the next four years (Jakarta Posr, 28 July). The cement industry has been less fortunate: construction growth has fallen particularly sharply. cement is more expensive to ship, and some of the indurtry's capacity is rather antiquated. Nevertheless, the President opened a very large exten- sion to the Padang plant in July, and exports are rising.

Progress in steel is a lot less encouraging. It has been claimed

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that Krakatau Steel earned a profit of Rp 45 billion in 1986 (Tempo, 21 February), that domestic prices are competitive, and that the company is able to compete in overseas markcts. How- ever, as was pointed out in a recent Konipm ( I September) editorial, much needs to be explained: how can Krakatau Steel compete in a depressed international market when it does not possess best-practicc technology? If it is competitive, why retain the import barriers? The explanation must be the government’s capital and energy subsidies, although detailed financial data have not been released. Steel imports through its afiiliated company are said to he unreliable, requiring domestic users to hold stocks of six to eight months, compared with the usual level of one month.

The promising progress in consumer and intermcdiate goods is not matched by the machinc and capital goods indusrries. Almost without exception. output has declined since the early 1980s (Table 4). These industries share many common problems: high protection (including outright import bans) spurred output only as long as there was a demand hack-log and domestic demand was growing rapidly; the industries are intensely regulated, and the government has imposed numerous requircments on modern sec- tor firms, such as the development of small industry subcontrac- tors; production activities are often scale-intensive. and so in a small fragmeutcd market high cost? are inevitable; and many of the products are highly income-elastic luxury goods. so they are first to feel the effects of weaker purchasing power.

The automotive industry may be over the worst of its difticulties. Capacity utilisation levels remain low, (about 46% according to one report; Bisnis Indonesia. 9 July); but there is evidence that deferred purchases and aggressive marketing have led to rising sales in 1987. Several companies have either commenced trial exports or are cxploring this possibility. as in the case of the locally-developed utility vehicle, Toyota Kijang (Jakarta Post, 26 June). The government has also deferred the target for full local content for a further three year?, and relaxed sourcing require- ments (Jakarta Pmt , 7 February). Howevcr, this is only tinkering at the margin. Thc domestic market is small (about 129.000 commercial vehicles and 34,000 sedans): the only long-term solu- tion is drastic rationalisation, including fewer producers. If the object of higher local content is still to he pursued, it should he through an incentive-oriented approach rather than through heavy-handed and complex controls.

The good news is that Indonesia’s manufactured exports (nar- rowly defined: that is SITC groups 5 to X less SITC 68) continue to grow. From $500 million in 1980 and $800 million in 1982, they are

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8s'- 68' 05'- 18' ~~ ~~

15'- W' 19'- 11' 91'- 89' 98'- 6E' W'. IT'

06'- ts ' 68'- +IT. 16'- 21 ' $6'- 61' 16'- 10'- 16'- SE'- 96'- 9Q'-

qL861 9861 5861 Q861 f861 1861 1861 .. .~

Le'- 01'- 96'- 2E'- 0861

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next decade, providing domestic competitiveness and international market acceys are maintained. They are also likely to generate their own momentum. because Indonesian commercial experience in export markets (in transportation, commercial contacts. sensitivity to export market tastes, and even meeting deadlines) is transfer- able across industrie?. Finally. there is a group of products for which long-term export prospects are not great, but which may still be quite significant exports 011 an irregular basis. Recent examples include steel, exports of which are likely to decline as domestic demand recovers. and perhaps automobiles, to the extent that recent initiatives have been the result in part of government pressure.

What lies ahead for Indonesia’s manufactured exports? Are the major bottlenecks likely to be internal or external? The answer to the second question is that domestic factors are almost certainly the key to growth. This is not to deny the dangers of protectionism in OECD markets. Textile protection in the US and the EEC has in recent years probably assisted Indonesia, to the extent that it has restrained the exports of more efficient. rival competitors. But Indonesia is no longer a newcomer, being the tenth largest gar- ment exporter (and the third largest in certain lines) to the US. Moreover, it is now close to filling its export quotas - there was a case of over-shipment in mid 1987 - so growth through greater quota fulfilment is no longer an option.

Nevertheless, unless there is a very serious increase in American protectionism, textile quotas are not going to be a major impedi- ment. A new export agreement is under negotiation which is thought likely to provide for 6% annual volume growth. This could translate into real value growth of 1@15% since it is purely a quantitative restriction. There is already evidence of Indonesian exporters moving up market in response to such restrictions, and as local quality improves. In the 12 months to May 1987, for example, the volume of textile and garment exports to the US rose by 13% while the value rose by 46%.

But, important though these exports are, they accounted for just 13% of all manufactured exports in 1986. Even in a subdued global environment, there is enormous potential for product and country diversification. This is illustrated by examining major OECD (US: EEC and Japan) imports of five labour-intensive manufactures from the four large ASEAN countries in 1985 and 1986 (Table 7). In spite of the recent growth, Indonesia’s exports of these goods are small compared to its neighhours (and even more so if com- pared to the Asian NICs). Putting aside the special case of Malay- sia, because of its large electronic exports, Philippine and Thai per

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I5 sc " 6C Zt 5 S , " 8 c

59 TI 11 011 101 I

8 8 t 7 r "

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the NICs have done much better in Japan. Japan has now decis- ively lost any competitive power in labour-intensive manufactures. Nor is there any persuasive evidence that there are major non- commercial import impediments to this market, other than an understanding of fairly complcx market channels and exacting consumer requirements. To maintain its export momentum, In- donesia will have to continue the emphasis on its traditional export markets in the United States and the EEC. But, in the longer term. a major assault on the Japanese market is also essential.

REFERENCES

Badrulzaman, M.D. (1987), 'Membenahi BUMN. Penero, Suatu Analisa Hukum' (Tackling State Enterprises and Limited Liability Compamcs, a Legal Analysis), Kompas, 21 May.

Booth. A. (198h), 'Survey of Recent Developments ' , UIES, 2?(3). pp. 1-26. Center for Policy Studies (CPS) 11987). Thhe lndonesian Economy, 6(8) (Midyear

England, V. (1987). 'Hitting the Gold Trail', Far Eastem Economic Revrew, 23

Hobohm, S . (IY87). 'Survey uf Recent Developments', UIES, 23(2). pp. 1-37. Kay, J.A & D.J Thompson (1986). 'Pnvatisation: A Policy tn Search of a

Rationale'. Economic Jourrral. 96, pp. 18-32. Morawetz, D (1981), Why rhe Emperor's New Clothes Are Not Made in Colombia,

Oxford IJnirenity Press. New York, for the World Rank. Nasution, A (1986), 'Instruments of Monetary Policy in Indonesia after the 1983

Banking Deregulation'. paper presented to Conference on Financial Research in Indonesia, Department of Finance and Harvard Institute for lntcrnational Development, August.

-(1987), 'Gebrakan Moneter Menteri Sumarlm' (The Monetary Shock Therapy aC Miniater Sumarlm), Kompas 22 July

Pangestu, M (lY87). 'Survey of Recent Developments', BIES 23(1), pp. 1-39. Singapore Government (1987), Repon of the Publrc Sector Divesmzenr Cornminee,

February. Sumitro Djolohadtkusumo (1986). 'Recollections of my Career', BIES, 22(3),

pp. 27-39. Sundrum, R.M. (1986), 'Indonesia's Rapid Economic Growth: 1%%81', BIES,

22(3), pp. 4G69.

Report).

July, pp 6 2 4 3

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